Rising Middle East Tensions and a Five-Day Surge in Oil Prices: The Hormuz Crisis and Response Strategies for South Korean Companies

Executive Summary

Following the expiration on August 17 of the Islamabad Memorandum, which was signed after the U.S.-Israeli airstrikes on Iran in February 2026, the dispute between the United States and Iran over the factual status of the Strait of Hormuz is directly fueling a risk premium in oil prices. The Trump administration has made low oil prices a top priority in its economic war against Iran. In response, Iran has signaled it will not capitulate by attacking UAE vessels, sending Brent crude up to $94.06 per barrel on August 20. EAI assesses that this dynamic is unlikely to be resolved in the short term and presents a baseline scenario (50% probability) of a 'new normal' of high oil prices, with prices fluctuating between $88 and $95 per barrel amid alternating periods of negotiation and tension. South Korean companies need a two-track response: reducing their reliance on Iran's unilateral transit system while separately monitoring the viability of Oman's mediation channel as a key risk indicator. In the short term, this requires reviewing transactions via the UAE for sanctions compliance and increasing the share of spot market procurement. In the medium term, diversifying supply sources is essential.

I. Situational Analysis

Situational Analysis: Rising Middle East Tensions and a Five-Day Surge in Oil Prices

1. Background and Timeline

The recent surge in oil prices began on February 28, 2026. A full-scale conflict in the Middle East erupted after the United States and Israel launched airstrikes on targets inside Iran.[8][10] Since the start of the war, the Strait of Hormuz has been under a de facto blockade.[8][12] Prior to the conflict, this waterway carried approximately one-fifth of the world's oil supply.[8][10][12]

On June 17, President Trump and the government in Tehran signed a memorandum of understanding known as the 'Islamabad Memorandum.'[5][6] It stipulated an immediate and permanent cessation of military actions on all fronts.[5] However, the memorandum expired on August 17.[5] Following its expiration, Iran shifted to a fully offensive policy posture.[5] The United States ruled out an extension of the temporary agreement.[5]

The Islamabad Memorandum contained a controversial provision. The Stockholm International Peace Research Institute (SIPRI) pointed out that the memorandum's wording could allow the United States to permit Iran to include the authority to permanently restrict freedom of navigation in the Strait of Hormuz in a final peace treaty.[6] SIPRI warned that such a development could have economic, political, and legal repercussions extending beyond the Gulf region.[6]

2. Current Situation

The temporary ceasefire agreement expired on August 18.[13][17] President Trump stated that no negotiations were underway with Iran and that none were scheduled.[13][17] At the same time, he claimed that the Strait of Hormuz was open.[13][17] This directly contradicts the assertion by a senior Iranian official that the strait remains blockaded.[13]

Amid these conflicting messages from the U.S. and Iran, oil prices rose for four consecutive trading days.[1] On August 20, Brent crude reached a three-week high of $94.06 per barrel.[7] WTI also rose in tandem to $87.67 per barrel.[7] Earlier, on August 14, Brent crude had closed at $88.52 per barrel due to an attack on an oil tanker and a lack of progress in peace negotiations.[16] On August 18, a combination of a missile alert issued by the UAE and President Trump's denunciations of Iran pushed Brent crude to nearly $92 per barrel.[11]

The market reaction has not been limited to crude oil. On August 18, a sell-off in U.S. Treasury bonds accelerated, with the 30-year Treasury yield soaring to its highest level in nearly two decades.[9] Fears of a wider conflict translated into inflation concerns, putting pressure on the stock market as well.[9] The News International, a Financial Times affiliate, interpreted the return of oil benchmarks above $90 per barrel as a sign that the energy market has abandoned hopes for a short-term resolution.[4]

Since August 14, Iran has attacked two UAE vessels in the Strait of Hormuz.[15] The Wall Street Journal analyzed this as a signal that Iran will not yield to further sanctions and as an expression of its intent to exercise military initiative while President Trump remains reluctant to resume a full-scale military conflict.[15]

3. Key Actors and Positions

United Stateshas elevated low oil prices to a top priority in its war objectives.[15] Senior Trump administration officials have threatened 'unprecedented financial sanctions' to compel Iran to reopen the Strait of Hormuz.[15] However, the United States has lost its direct economic incentive to protect the strait due to its increased energy self-sufficiency.[10] Nevertheless, it faces a structural dilemma, as the oil price shock from a blockade translates into domestic political burdens.[10]

Irandefines control over the Strait of Hormuz as an asymmetric lever directly linked to regime survival.[10] It maintains its position that the blockade will continue without a U.S. military withdrawal and the lifting of sanctions.[10] An Iranian military spokesperson has stated, 'The United States has no choice but to accept Iran's order in the Strait of Hormuz.'[10]

UAEsuspended all trade, commercial, and financial transactions with Iran until further notice following Iran's ballistic missile launch.[8] At the same time, the UAE is reaffirming its commitment to dialogue and regional integration.[8] This suggests a balancing strategy of modulating pressure between the United States and Iran rather than completely severing ties with Tehran.[8]

Omanhas served as the de facto sole mediation channel in the Gulf region.[5][10] However, President Trump's threat to bomb Oman is jeopardizing this channel itself.[5]

Chinais an affected party, as it relies on the Strait of Hormuz for a significant portion of its crude oil imports.[12] Consequently, it is maintaining a cautious approach to a strategic alignment with Iran.[12]

4. Key Issues

The primary issue is the coexistence of conflicting claims from the United States and Iran regarding whether the Strait of Hormuz is actually open.[8][13][17] This has created a dynamic where the market fluctuates based on political statements in the absence of clear facts.

The second issue is the fact that as of August 11, all 11 vessels that transited the strait did so using Iran's unilateral passage system.[5] This implies that the system has become the de facto standard route.[5] However, its precarious legal status entails the risk of a sudden suspension of operations in the future.[5]

The third issue is the possibility that the provision in the Islamabad Memorandum concerning the right to restrict navigation could be made permanent in a future final peace treaty.[6] Concerns have been raised that this could set a precedent affecting the principle of freedom of international navigation itself, well beyond the Strait of Hormuz.[6]

II. In-Depth Analysis

In-Depth Analysis: Rising Middle East Tensions and a Five-Day Surge in Oil Prices

1. Analysis of Root Causes

The root cause of the recent oil price surge is not a simple supply disruption. The core issue is the uncertainty stemming from the conflicting facts presented by the United States and Iran regarding transit through the Strait of Hormuz. President Trump has publicly stated that the strait is open.[13][17] A senior Iranian official has countered that it remains blockaded.[13] The very situation of two state parties announcing contradictory facts about the same issue is driving up the market's risk premium.

This dynamic did not arise by accident. The Trump administration has established low oil prices as a primary objective in its war against Iran.[15] Its strategy is to lower oil prices to cut off Iran's oil export revenues and to compel the reopening of Hormuz with unprecedented financial sanctions.[15] Iran has responded with force, signaling it will not capitulate. The attacks on two UAE vessels in the strait since August 14 are a case in point.[15] The Wall Street Journal interpreted this as a declaration by Iran that it is immune to further economic sanctions and an attempt to seize the military initiative while President Trump hesitates to resume a full-scale war.[15] In short, the rise in oil prices is a product of the interplay between America's declaration of economic warfare and Iran's military response.

2. Structural Context

Political Structure: The failure of the Islamabad Memorandum provides the political backdrop for the current situation. Signed on June 17, the memorandum declared an immediate and permanent end to military actions on all fronts.[5] However, upon its expiration on August 17, Iran shifted to an offensive posture, and the United States refused an extension.[5] The Stockholm International Peace Research Institute notes that the memorandum's text left open the possibility for a final peace treaty to grant Iran the authority to permanently restrict freedom of navigation in Hormuz.[6] This is a provision that could have repercussions for the principle of freedom of navigation worldwide, extending beyond the Gulf region.[6] The legal text of the negotiation itself has thus become the seed of the next crisis.

Economic Structure: It is assessed that the United States has lost its direct economic incentive to protect the strait following the shale revolution, which increased its energy self-sufficiency.[10] Nevertheless, it faces a structural dilemma where an oil price shock boomerangs back as domestic inflation and interest rate pressures.[10] Indeed, on August 18, an accelerated sell-off in U.S. Treasuries sent the 30-year yield to its highest level in nearly two decades.[9] Fears of a wider conflict are spreading across the oil, bond, and stock markets.[9]

Security Structure: For Iran, the Strait of Hormuz is an asymmetric lever directly tied to regime survival.[10] An Iranian military spokesperson has stated that the United States has no choice but to accept Iran's order in the strait.[10] Based on this perception, Iran insists it will maintain the blockade without a U.S. military withdrawal and the lifting of sanctions.[10] The Gulf states are not immune to this structure. Iran's chief of staff of the armed forces has warned that providing support or facilities to U.S. forces by Gulf countries would be considered an act of war.[8] This is why the UAE is exposed to the risk of being dragged into the conflict regardless of its own intentions.[8]

3. Historical Precedents and Comparative Cases

The current crisis exhibits a recurring pattern of alternating negotiation and tension. A ceasefire agreement was reached in April but soon collapsed as attacks within the strait continued.[12] A second ceasefire was established in June with the Islamabad Memorandum, but it too fell apart upon its expiration on August 17.[5] In both instances, political declarations were made, but the root cause of military tension—the issue of control over the strait—remained unresolved. A pattern has repeated itself: oil prices temporarily stabilize whenever an agreement is reached and surge again whenever one collapses.[7][16]

Oman's role as a mediator is also comparable to past cases. Oman has functioned as the sole channel of dialogue between Iran and the United States.[10][12] There were even assessments that an Iran-Oman agreement on sharing control of the strait was close at a working level.[12] However, analyses suggest that the combination of Iran's demands for war reparations, the question of final U.S. approval, and domestic political resistance from Iranian hardliners makes an unstable, partial reopening more likely than a full normalization.[12] This is similar to the dynamic during the 'Tanker War' phase of the 1980s Iran-Iraq War, where security in the Gulf waters was restored only partially and temporarily.

4. Key Variables Shaping Future Developments

First is the viability of Oman's mediation channel. President Trump's threat to bomb Oman is identified as a variable that destabilizes the only mediation channel in the Gulf region.[5] If this channel collapses, the entire structure of alternating negotiation and tension could break down.[5]

Second is the legal status of Iran's unilateral transit system. As of August 11, all 11 transiting vessels were confirmed to have used this system.[5] While it has become the de facto standard route, its unstable legal basis carries the risk of a sudden suspension of operations.[5]

Third is whether the involvement of Gulf states will expand. After being targeted by Iranian missile and vessel attacks, the UAE suspended all trade, commercial, and financial transactions with Iran until further notice.[8][15] At the same time, it is striking a balance by reaffirming its commitment to dialogue and regional integration.[8] If this balance collapses and the Gulf states become direct parties to the conflict, oil prices could surge far beyond current levels.

Fourth is the intensity of U.S. financial sanctions. Whether the 'unprecedented financial sanctions'[15] threatened by the Trump administration are actually implemented at a level that cuts off Iran's oil exports is a variable that will determine the intensity of Iran's response.